Value Investing Strategies of Warren Buffett and Benjamin Graham

Archive for October, 2005

I was looking forward to the tea break at the end of the first session as I was feeling hungry. To my utmost surprise, there were no refreshments provided. Not even any finger food! The organisers must be trying to get their full ‘value’ for money…

What they had, however, was a booth selling some of Robert Miles products. There was a bundle of 3 books and 2 audio sets selling for a discounted price $200.

I find it wierd that they were only selling the bundle and not the individual products. Surely, there were people who only wanted to get 1 or 2 of the items but not all?

Back to the seminar. In the second session, we were told the character or traits that we should look for in the managers of the companies that we were going to invest in. 6 pillars of character are trust, respect, responsibility, fairness, caring and patriotism.

3 traits that Warren looks out for were integrity, intelligence and energy. And how does he do that? Simply by reading the annual reports of the company! By following the annual reports for many years, it is sometimes possible to tell whether what was stated in previous years have been acted upon.

This was followed by a presentation on the key managers of the various subsidiaries of Berkshire. This was quite a boring segment and I actually dozed off…

A common trait was that these people really had passion for their business. They were working even up to 80, 90 years old and retirement was simply not an option. If you liked what you were doing, why should you retire to sit at home doing something else?

In a nutshell, two quotes to always keep in mind:Invest with people you like, admire and respect.Sell when they are not managing the business for the benefits of shareholders.

In this session, we are shown the awesome track record of Warren Buffett. In just 40 years, the earnings of Berkshire Hathaway has grown from one million to eight billion dollars. And the stock price has grown from $7 to $80,000. That’s ten times the price every ten years!

Here’s a self-made billionaire who as a kid, started off by delivering newspapers (Later on, this also turned out to be one of his best investments, Washington Post). His investment methods were taught by Benjamin Graham. I would certainly be getting hold of the two investment classics written by Ben, The Intelligent Investor and Security Analysis.

One thing that Warren values is reputation. He once told his son:”It takes a lifetime to build a reputation and only five minutes to ruin it. And if you think about that, you might do things differently.”

In his annual letter to his managers, he always begins it the same way:”Dear all-star manager, we can afford to lose money. In fact, we can afford to lose a lot of money. But never do anything in business that you wouldn’t want published on the front page of your local newspaper written by an intelligent but critical reporter.”

If we look at the recent scandals in the corporate world, we can see many cases of management ‘cooking’ the books to make their earnings report look good as well as enhance their own performance bonus. All these takes place at the expense of shareholders!

The character and values of the management is certainly something to look out for next time we read those annual reports. Using Einstein’s famous formula, we derive another formula: Earnings = Management x Character x Character.

The portfolio of Berkshire consists of 5 stocks that make up some 70% of the entire portfolio (Please see comments for a slight correction). Certainly, we do not see diversification here. If you know what you are buying, what’s stopping you from buying more of something that is of value? Finding a good stock is already difficult. How are you going to find 20 good stocks if you limit yourself to 5% of your portfolio for any stock?

On the other hand, if you do not know what you are doing or understand what you are buying, you are taking a big risk!

The seminar started at 0900hrs inside one of the rooms at Suntec Convention Centre. Looking around, I think there were about 100 people in the room. I met up with my university friend who was also one of the participants but I didn’t see the guy whom I saw at the preview.

Among the participants were also Wendy Kwek and Ken Chee of Executive Directions. Ken always had plenty of questions for Robert throughout the seminar.

For the introduction, we were supposed to write down in our workbook what we already knew (K) about Warren Buffett, Berkshire Hathaway and value investing as well as what we wanted (W) to learn. At the end of the day, we will write down what we have learned (L). It’s represented neatly by the term KWL.

This was followed by an outline of the seminar objectives and expectations. All were pretty realistic objectives with no signs of any quick rich methods.

I had been seeing the same old advertisement in the newspapers for a few days promoting this particular seminar by Robert P. Miles. Well, it won’t hurt to go for the preview. I should have something to learn from this guy since even Warren Buffett endorses his books.

12th Oct 2005. I was walking around at Bugis Junction when someone came up to me to ask for directions to Parkview Square. Hmm..isn’t that the venue of the preview seminar? I found out that he was also going to the preview. Unfortunately, I didn’t know where Parkview Square was at that time and couldn’t give him the directions he asked for.

Fast forward 2 hours….

The preview was a bit of a disappointment. It was essentially that, a preview. Robert was telling us the things that he will be covering during the actual seminar. Nevertheless, the steerling records of Warren Buffett presented during the preview continued to amaze me. And the cost of attending the seminar? $538. At the preview, there was a special promotional price of $488. And if I could get a group (2 or more) to sign up together, the cost would only be $450.

As fate would have it, the person who was asking me for directions earlier on was also there and wanted to sign up. So, we did the smart thing and signed up together to get the group price of $450. There was something wrong with the credit card reader though and he didn’t manage to complete the transaction. I didn’t hang around to find out what happened to him in the end.

Hmm.. $450 for a one day workshop would be a reasonable price to pay if I could pick up a couple of good ideas from it. My investments had not been doing well lately and I certainly needed a nudge in the correct direction. And what better way to get the nudge than from the world’s greatest investor?

Since 2000, I have had a very keen interest in stuff like investment and financial planning. I had also read countless books and articles on this topic. While most of the fundamental concepts are deeply entrenched in my mind, I realised that I have also forgotten quite a fair bit of what I had learnt.

In fact, if you were to ask me about a particular book that I had read, chances are that I can’t tell you what I had learnt in it! To retain knowledge in any topic, it is important to continuously recall and apply what you had learnt.

Thus, I have decided to start this site to serve as a collection of useful information that I had encountered (or am going to encounter). I will try to provide summaries and my own thoughts as we go along.

Hope you find this place beneficial!

In my next post, I will talk about a seminar on Warren Buffett that I attended a week ago. It was also through this seminar that prompted me to finally start this site (after sitting on it for a while).